INTANGIBLE CAPITAL VALUE

by Erwan COATNOAN DE KERDU

Your copilot in creating a successful company

Intellectual Property: Legal and Financial Assessment

  by Erwan Coatnoan de Kerdu

The value of intellectual property is a key element in the capitalization process. The value of industrial property rights is becoming more and more important in these operations. The financial valuation of intangible assets, i.e. industrial property rights, makes it possible to appreciate all the financial aspects of a strategy, and to manage rights more efficiently. This can become particularly profitable if the whole is properly managed. 

The value of intellectual property is a key element in the capitalization process. The value of industrial property rights is becoming more and more important in these operations. The financial valuation of intangible assets, i.e. industrial property rights, makes it possible to appreciate all the financial aspects of a strategy, and to manage rights more efficiently. This can become particularly profitable if the whole is properly managed. 

Knowing the value of assets, whether for the purposes of a negotiation, a transfer, the calculation of damages or for any tax issue, allows for a total and fair control of asset management. 

Intellectual property rights

Intellectual property rights include various elements such as trademarks, patents, copyrights, software or even models and designs. All of these are assets for companies, especially for start-ups for which accounting is still too young. Regardless of their size and sector, all companies need to know the exact value of their assets. 

However, valuation operations are highly technical analyses, particularly from a legal and technological point of view, but also from a financial and economic point of view. Imbalances between the company’s partners can result from a poor evaluation of intellectual or industrial property rights. It is therefore important to measure each risk. As a general rule, intellectual property assets are considered to be riskier than a company’s other assets. Investors conduct due diligence before making an investment decision. 

A prior legal analysis 

In order to carry out a financial evaluation of industrial property rights, it is essential to carry out their legal evaluation. This evaluation concerns above all the rights, and it is therefore essential to identify their origins, their scope, their content, their risk levels and their ownership. An economic evaluation that does not take into account the intrinsic qualities of these rights most often leads to difficulties and is probably meaningless. 

Evaluation and its purposes 

The valuation of intellectual property has several purposes, all of which are essential and useful to the company:

  • To obtain a basis for negotiations on guarantees and prices; 
  • Obtaining a solid basis for fixing the contribution to the IP rights;
  • Create shareholder value; 
  • Obtaining competitive advantages;
  • Implementing a policy for the valuation of intellectual property assets ;
  • To manage the balance between the managing shareholders and the contributors of funds as well as possible;
  • Optimize the tax structure for the company and its creators;
  • Giving equity a foundation.

An evaluation with several objectives 

The valuation of intellectual property has several objectives and valid reasons for being carried out. First and foremost, it is a matter of establishing a value which will then form the basis for negotiations with the providers of funds. It also makes it possible to measure the extent of the intellectual property rights within the creation of the result as well as the risks linked to the economic model followed. 

On the other hand, in the eyes of creators in particular, the fiscal objective is essential. Financiers wish to ensure the influence of intellectual property rights as well as their appropriation by the company to which they are granting financing. This is all the more valid when these rights constitute essential assets for the creation of the result for the company in the chosen economic model. 

Finally, the valuation of intellectual property rights makes it possible to assess the value of the rights contributed during research and development consortia. For this purpose, the financial evaluation of the contributions of all participants is essential to the setting of rules for sharing results. The evaluation also makes it possible to ensure that there are no situations of infringement, litigation, fraud or contractual breaches in the context of intellectual property rights. 

Between evaluation and valuation 

Valuation and valuation of IP rights are two very different analyses. However, valuation provides a measure of the value of IP rights in a specific context: current exploitation and their value in the event of additional funding and faster, active valuation. 

Valuation is primarily about estimating a value of the asset at a certain date against a singular objective. The operation brings together all the qualities and characteristics of the assets and reduces them to a single monetary value that will be valid during a certain period or at a specific date depending on the environment. 

Valuation is really about creating an economic value from an asset or a set of assets using a process and various management methods. In this context, the first step in the process is to perform a financial valuation of the assets. 

Several phases of financial evaluation 

The financial valuation of intellectual property rights goes through a series of essential phases:

  • Defining the context of the mission;
  • Understanding and defining the mission as a whole;
  • Description of the origin of the securities, their administrative and other status ;
  • Grouping of assets between market and technical clusters ;
  • Definition of legal risks and their potential (technical scope, intrinsic and extrinsic values, geographical dependence…). 
  • Analysis of product and service lifetimes and obsolescence ; 
  • Analysis of the various potential markets as well as the conditions necessary for the exploitation of the rights ; 
  • Implementation of at least three evaluation methods;
  • Measurement and analysis of explanatory factors and differences ; 
  • Drawing conclusions about value; 
  • Create appendices related to the sources of the selected information. 

This is a very substantial task, but it provides a solid basis for negotiations and financing. This is usually done by an independent specialist who will be able to assess the value of the IP portfolios, including the financial and economic dimensions. 

Risk measurement

The valuation method must always take into account the legal risks that may affect the economic potential of an intellectual property right. Quantifying the risks then allows for a relevant and objective weighting of the result. 

The valuation of a patent cannot be done without considering the legal and technical dimensions without leading to potential large-scale errors. It is for this reason that intellectual property rights are generally overvalued. 

On the other hand, similar consequences can result from evaluating software without measuring the risks associated with its origins and protection. Software is often not created in the companies that want to market it. The entity that will own it will then have to ensure that it is owned in its entirety. 

Finally, evaluating the trademark without taking into account the various legal risks (scope, validity, anteriority, freedom to operate…) can lead to an investment without return since the economic results and data most often depend on the security and validity of intellectual property rights. 

In conclusion 

A legal (or legal and technical) valuation must always precede a financial valuation of IP rights to be relevant. 

 

Mieux vous connaitre en 1 clic